Defenses to a Contract
Contract defenses refer to the arguments that a person makes when they wish to avoid the responsibilities that are placed on them in a contract. They essentially deny or challenge the validity of all or part of an agreement to alter the legal outcome or damage award. These defenses address the validity of the contract or the legitimacy of some aspect of the relationship in question. If the contract is relatively unimportant, then defending a case based on a contract defense may or may not be a good decision. However, in some cases, being able to prove that your case involves intellectual property or that the other party signed the contract under duress or threats is crucial when it comes to limiting liability .
If you encounter any of the following scenarios, you have likely encountered a contract defense:
However, just because you may have a contract defense does not guarantee that the argument will hold up in court. Be sure to discuss your case with a qualified contracts attorney before you assume that you are in the clear simply because you have a contract defense. That being said, some contract defenses, such as fraud or lack of capacity, can allow you to challenge the contract’s validity and avoid liability.
Typical Defenses to a Contract
Contracts can be voided for a number of reasons. Understanding the most common contract defenses will make you a better drafter and help you to avoid legal pitfalls in your contracts. The following are the most common contract defenses:
Fraud – fraud occurs when a party uses trickery to get you to accept contract terms. In order to have a successful fraud claim, the plaintiff must prove: (i) the misrepresentation was material, intentional, false and known to be false, and (ii) the other party relied on the misrepresentation. Where fraud exists, the non-breaching party is entitled to rescission of the contract. For example, if a seller knowingly misrepresents the quantity or quality of goods sold to the buyer, the contract will be voidable at the option of the buyer.
Duress – duress occurs when one party uses intimidation or threats to force the other party to enter into a contract. Both parties must consent to the agreement for the contract to be enforceable; however, it is possible for one of the parties to be forced into the contract under threat of an illegal act or extreme physical or economic pressure. For example, if a robber points a gun to your head and forces you into a contract, that contract will be voidable at your option.
Unilateral Mistake – unilateral mistake is a party’s mistaken belief about a basic assumption on which the contract was made. The mistaken party must be able to show that either (a) the other party knew or had reason to know of the mistake, or (b) the mistake would cause a material, adverse effect that is not caused by the fault of the mistaken party, or (c) the contract is not unconscionable. For example, if a buyer secretly tells a seller that he wishes to pay $60 for a chair worth $100, but then negotiates the price up to $100 thinking he is getting a steal, the buyer is not able to say the contract is void due to unilateral mistake because he made a deliberate error.
Mutual Mistake – a mutual mistake occurs when both parties are mistaken as to a basic assumption on which the contract was based, and the material effect of the mistake is that the agreement has a significantly different outcome than what was anticipated. For example, if two parties entered into a contract for the sale of rare sculptures and it turned out the sculptures did not exist, the contract would be void due to a mutual mistake of fact.
Misrepresentation – if one party makes an assertion about a contract term that is untrue, a misrepresentation may occur that will justify voiding the contract. A misrepresentation can be caused by an intentional or negligent statement of one of the parties. For example, if a doctor tells a patient that a procedure is safe and it is actually unsafe, the negligent misrepresentation of the doctor can be grounds for recission if it causes the patient to enter into the contract.
Impossibility – a contract may be deemed impossible if there is an impossibility of performance. Impossibility may occur if a party is physically incapable of performing the contract, the subject matter of the contract has been destroyed or become illegal, or the contract has become commercially impracticable. For example, if a defendant cannot be found and brought to trial due to an earthquake that wipes out the courthouse, the contract for an immediate civil or criminal trial will be considered impossible to perform and would be void.
Fraud as a Defense to a Contract
If the defendant believes that the plaintiff engaged in fraud prior to the formation of the contract, then this is a defense to the contract and it can be proved by clear and convincing evidence.
Specifically, each of the following elements must be established to prove fraud:
(i) a representation,
(ii) the falsity of the representation,
(iii) materiality of the representation,
(iv) knowledge by the party of the falsity of the representation,
(v) intent to induce reliance upon the representation by the plaintiff,
(vi) justifiable reliance by the plaintiff, and
(vii) actual damages (this does not mean intended damages, but actual damages).
Pennsylvania Department of Transportation v. Smith,
If all of those elements are established, then the plaintiff cannot recover for breach of contract because the basis of the contract was fraud.
Pennsylvania Department of Transportation v. Smith, 679 A.2d. 192, 196 (Pa. 1996).
Duress and Undue Influence
Two of the most frequently asserted defenses to contract formation are duress and undue influence. Duress occurs when a party is forced or coerced into contract formation – for example, under threat of harm. Undue influence is somewhat different. A contract formed under undue influence is one in which one party abuses a position of trust to persuade the other party to enter into an unconscionable agreement. The essential distinction between the two scenarios is that duress may occur at the moment a contract is formed, while undue influence typically occurs over time, before the contract is formed.
An example of duress: you owe your neighbor some money. Your neighbor is upset, and at your front door, holding a baseball bat with angry intent. You don’t have the money to pay him off, so you readily sign a consent restraining order against yourself. Even if the signature on the restraints is yours, the consent order is voidable because you were under duress.
An example of undue influence: an elderly widower’s son lives with him. The widower’s son has always handled his father’s finances. One day, his son convinces his father that he should amend his will. The widower’s son knows that his father would not want his estate to go to anyone other than him. He also knows that the amendment to the will, which is in the father’s handwriting, favors him, and places the majority of the assets in his control. While it is the father’s handwriting on the document, the father was under the son’s undue influence when he amended the will.
Undue influence can also be sustained even after a signature is placed on an agreement. If the signing of an agreement is the first opportunity to cancel, and undue influence existed before the agreement, a court of equity can set aside the contract if it was unfairly acquired. When a party has used his superior power, which places another at a disadvantage, a court may reform the contract.
Mistake and Misrepresentation
Contract defenses such as mistake and misrepresentation can render a contract voidable or void, depending on the type of mistake or misrepresentation that occurred. A mistake is a belief that is not in accord with the facts. It addresses a belief that a fact or event is true when in fact it is not, or vice versa. While each party must generally be diligent to guard against mistakes, the law will sometimes grant relief to a mistaken party. Misrepresentation addresses a statement relating to a material fact on which the other party reasonably relied. A misrepresentation is usually a positive act in the formation of a contract as distinguished from mistake, which may result from innocent conduct. Both defenses of mistake and of misrepresentation give rise to a right of rescission to the party who objected to the mistake or misrepresentation at the time it occurred. However, no right of rescission is available to the party who fails to object to the mistake or misrepresentation at the time it occurs. Relief can also be granted by way of damages for fraud if the misrepresentation was intentional and fraudulent to the other party. Thus, to prevail on a misrepresentation defense, it is usually critical that a party raise the argument upon discovering the misrepresentation. In a case of mistake, it is not usually sufficient that the mistaken party later realizes that he made a mistake about some fact.
Impossibility and Frustration of Purpose
Impossibility and frustration of purpose are two defenses that aim to help a party argue against contract performance after a contracting event has occurred that makes it unduly burdensome or even impossible. Generally, a successful invocation of impossibility or frustration will result in a discharge of the contract while a partial or total breach may also result in contract termination.
There are three groups of events that will affect the court’s determination of whether a contract should be discharged based on an impossibility or frustration defense: Impossibility is invoked when there’s an incapacity of one of the parties to perform their duties under the contract. For example, a contract cannot be performed if, for any reason, neither party is able to deliver the subject matter of the contract. This lack of ability to deliver is often called the subject matter’s "destruction." The destruction may include a natural , foreseen or unforeseen destruction of the subject matter of the contract.
Other ways a contract may become impossible involve the death of a party or the physical incapacity of a party. Contractual inability to do something may also occur when the contract is impossible to fulfill because of a legal prohibition.
Both impossibility and frustration of purpose may be used as a defense to breach of a contract, but both terms have varied definitions. Although they’re frequently used together, impossibility and frustration of purpose are not the same thing.
Impossibility requires that the subject matter of the contract is somehow rendered incapable of being performed. Therefore, if an unexpected situation arises that would ordinarily be treated as part of normal risks of doing business or as a risk specifically assumed by the parties themselves, the contract will not be discharged for impossibility. Courts generally don’t allow persons to avoid their obligations by saying that the contract was impossible to perform.
Capacity as a Defense to a Contract
A lack of capacity can serve as a contract defense to both sides of a contract. In order for the lack of capacity to be available as a defense, the principal must lack capacity at the time of the execution of the contract in question. Lack of capacity can exist in a number of instances including insanity such that the person lacked that ability to understand the nature and meaning of what they were doing. Third parties, including corporations and partnerships, also lack capacity if their ability or power to act is suspended or is defined by operation of law. In addition, minors, individuals less than 18 years, are ruled to lack capacity such that a contract will be routinely voidable in their hands. While not authoritative, two corollary sections in the Restatement (Second) of Contracts do seem to indicate the view in many jurisdictions that a minor who engages in a business, which ordinarily requires a public license, will not be able to take advantage of that incapacity when a contract is made in the course of that business.
Remedies Where Contract Defense Is Valid
Regardless of the type of defense raised against the contract, if your defense proves to be valid then you are able to seek legal remedies to preserve your rights. After a successful defense has been established, depending on the circumstances, the aggrieved party may be entitled to either claim damages or rescission. Many times a party may choose to seek monetary damages for breach of contract. This means that the court has ordered the breaching party to pay the other party a specific amount of money. The award of monetary damages is written into a judgment to become a lien against the payment of any real property owned by the breaching party. A rescission remedy, on the other hand, allows a party to cancel the contract and starts the process of restoring all the parties involved to the situation they were in prior to entering the contract. Rescission essentially sets aside the contract where the parties are restored to their pre-contract positions. If no court-ordered rescission is established, a party may, however, still seek restitution damages which restores the innocent party to its prior position by returning any benefit conferred under the contract such as the return of a deposit or purchase price. For example, an award of restitution damages and award of monetary damages are mutually exclusive, so a party may not be awarded both damages.
Making a Contract Defense
The most important part of establishing a contract defense is maintaining the contract that you want to enforce. Both before and after litigation begins, you should do everything you can to keep the contract that you want enforced in effect. (In the alternative, you should arrange for the invalid contracts on either side of a transaction or relationship to be set aside.) Key aspects of this effort include:
If a breach occurs that you have reason to believe could lead to litigation, do not take any action that waives your rights under the contract. You may even want to contact a lawyer at an early stage to develop a strategy of preserving defenses to the possible breach. Then , if a breach is sufficiently severe to require litigation you can act decisively by retaining a lawyer quickly, preserving evidence of the breach and developing a strategy for keeping the contractual relationship in place.
In addition to preserving contract defenses, you should always investigate the nature of the breach. The investigation may lead you to evidence that allows you to defend against a breach of contract suit, or it may reveal whether you need to commence your own action to enforce a breach. Because evidence is important and can be difficult to discover, you may want to seek assistance from counsel before you interview witnesses or begin to obtain records.